MSouth sues counsel over $7.6 million tax bill

MSouth Equity Partners has filed a lawsuit against its long-term counsel Alston Bird over a $7.6 million tax bill it alleges it incurred as the result of bad legal advice.

The Atlanta-based firm aims to claw back the money it paid in federal and state taxes and interest following a deal in 2011 which involved another Alston client.

The complaint claims lawyers admitted in correspondence to the Internal Revenue Service they had made a mistake when they advised LMS Intellibound Group – in which MSouth held a majority share – that LMS’s 2011 merger with another investment firm to form Capstone Logistics would not be skeptically viewed by the IRS.

Affidavits from the former chair of the tax section of the Atlanta Bar Association and the State Bar of Georgia were included with the complaint. They stated Alston & Bird’s tax advice and its subsequent failure to acknowledge the error to MSouth and LMS violated state professional standards of legal ethics and “constituted legal malpractice.”

It is also alleged Alston compounded its initial tax error by both failing to notify its clients of its error after the IRS launched an audit of LMS in 2014, and by advising MSouth when Capstone was sold in 2014 that it should indemnify Capstone's prospective buyer on any outstanding tax liability.

This advice shielded Alston from liability associated with what eventually resulted in a total tax liability exceeding $15 million – $7.6 million of which was billed to MSouth based on its majority holdings in LMS.

The lawsuit also seeks punitive damages based on allegations the law firm exhibited “willful misconduct, malice and fraud,” and a “conscious indifference to the potential consequences” to its clients.